Almost eight years after the Atal Bihari Vajpayee government set up the Pension Fund Regulatory and Development Authority, or PFRDA, through an executive order, the Manmohan Singh government has now got its Cabinet to approve legislation to give the body a statutory status. The task is not over yet. The Bill will now be presented to Parliament during its winter session starting next week. Political hurdles to the Bill, too, are not over.
The Bharatiya Janata Party (BJP) is not too happy with the government's decision to not accept two key recommendations on the Bill made by the parliamentary standing committee, which is headed by BJP leader and former finance minister Yashwant Sinha. If proof is needed of how tardy the process of economic reforms has become in this country, it is this. Also, the irony of the nature of the opposition to the Bill should not be lost on anyone. The Left parties are so far conspicuous by their silence, even though the Bill's purported beneficiary will be the millions of workers in the private sector whose constituency the Left seeks to represent in most public debates and forums including Parliament. And the opposition from BJP would be even more ironic, if not incongruous, since the PFRDA was created by a government it led in 2003.
The bone of contention over the new contours of the PFRDA legislation as approved by the Cabinet is the government's refusal to either fix a minimum return on investment by subscribers to the pension schemes or specify a cap on foreign investment in the pension sector. No prudent policy should ever espouse a scheme that relies on the stock market for returns and yet specifies guaranteed income to its investors. This is the surest way of embarking on a treacherous path. If the Employees' Provident Fund Organisation, the largest provident fund organisation with more than 40 million members and a corpus of over Rs 3.7 lakh crore, has got into any trouble, it is because of its historical liability of having to live up to the expectations of paying a fixed and higher return to its members.
A similar mistake in respect of PFRDA could be risky and financially imprudent, particularly because its corpus will have to earn from investments in the stock market. What the lawmakers instead should insist on is to stipulate greater disclosure on the nature of PFRDA's investments and offer its investors a choice between taking the risk of stock market returns and opting for the safer pasture of assured returns from debt instruments.
On the question of fixing a 26 per cent cap on foreign direct investment (FDI) through a notification and not through the main legislation, the government seems to have played safe. Its unsuccessful attempt to get Parliament to agree to raise the foreign investment limit in insurance (where it is mandated under the main legislation) seems to have influenced its decision to keep this issue outside the purview of the pension Bill. This may be a smart move, but it reflects poorly on the government's ability to get such changes approved in Parliament as also on the opposition political parties' perspective on reforms. Only time will tell if the proposed FDI regime will be attractive enough for giant pension funds like Calpers to consider investments in the pension sector in India after the passage of the Bill.